Analyze Your Profit Contribution

How to determine contribution to profit and overhead

Trying to maximize profit contribution can conflict with trying to grow your business. In other words, do you want profit or growth?

Of course, you want both. Unfortunately, one of these goals comes at the expense of the other.

Maintaining a balance of mailings to your customer file (where the profits come from) versus mailing to prospects is critical to your bottom line. How do you evaluate contribution from mailings to the housefile and catalogs you circulate to prospects?

This month, I’ll discuss the incremental break-even point compared to a fully absorbed break-even point as they relate to contribution to profit and overhead.

Calculations

See the definition on this page for what contribution to profit and overhead means. The formula is:

gross sales – returns = net sales – cost of goods sold – direct selling expenses – variable order-processing costs = contribution

A positive contribution to profit and overhead exists if there are excess funds available after the formula has been applied. To calculate contribution, you must know the cost of the catalog (in the mail), your customer returns ratio, gross margin ratio and variable order-processing costs. Once you have this information, you can determine contribution to profit and overhead from the mailings.

Using this approach you can easily discern the revenue per catalog needed to break even on an incremental basis (before overhead expenses). Determine the contribution from all mailings. It’s up to your finance department to apply overhead expenses to determine the overall profitability of the company.

See the chart “Proforma Contribution Statement” on page 36. The example is based on printing 1.2 million catalogs for a holiday mailing (a consumer gift catalog). The overall revenue per catalog is $2.10 per book, and the average order size is $60.

We used a 3.79-percent returns ratio, and a cost-of-goods percentage of 47. Direct selling expenses are $740,780, or $0.617 per catalog. This produces a 30.5 percent selling expense to sales ratio, typical for a consumer catalog.

Stephen R. Lett spent the first 25 years of his career in executive-level positions at both business-to-business and business-to-consumer catalog companies, including Monarch Marketing Systems, Tandy Corp., Edmund Scientific Co., The Drawing Board and Country Curtains. Additionally, he owned... the Writewell Co., and started (and owned) The Write Touch.

He also taught direct marketing at Indiana University. Today, Steve owns Lett Direct, a catalog and internet consulting firm specializing in circulation planning, plan execution, analysis, as well as internet marketing and email marketing. He’s the winner of a Silver Mail Box Award from the Direct Marketing Association (DMA), is a past chairman of the DMA’s Catalog Council, and a former member of the DMA’s Committee on Ethical Business Practices. Steve also writes a monthly column in Catalog Success Magazine.

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